Acquisitions

Acquisitions are the acquiring (purchasing) of a new company. An acquisition is also permanent but has one person/group dominant; it affects the entire company and usually occurs between companies of different sizes. Acquisitions are really about companies in search of CEOs.

Acquisitions: The Buyer’s Corporate Culture Can Impact a Seller’s Price

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corporateA recent pre acquisition due diligence process raised a fascinating question for the leaders of both entities.

Like most due diligence processes, the leaders of each business began with valuation formulas and a series of questions. If the industry multiplier for acquisitions is currently averaging between 5 and 6, would 5.5 X net profit be an affordable purchase price?  If so, will the seller accept payment over time to reduce strain on the buyer’s cash? Could a lower purchase price be acceptable to the seller if more cash is involved up front? What percentage of the seller’s existing customers should the buyer realistically expect to retain and at what revenue/customer?  What’s the value of the seller’s equipment, inventory and vehicles? How should the seller’s sales pipeline be valued? Which prospective customers might hesitate if a new owner is involved?  Would there be additional costs associated with any differences in geographic areas or target markets/customers?  Which employees are most important? Should anyone be paid a bonus to stay and give the buyer a chance? What additional costs should be anticipated due to employee turnover?  Could the possibility of an acquisition simply invite employees to leave and start their own competing business?

We slowed them both down and asked that they consider if and how the goal of profitable business growth would be served by an acquisition? The answers and values related to the questions listed above are impacted by whether the purchase being considered will eliminate a competitor, increase the buyer’s production/capacity or add complementary products/services to the buyer’s offering.

In this situation, the services provided by the seller’s business require more experience and training. The acquisition would add a desired complementary service to the buyer’s offering.  The people-related questions became the major variable in these pre-acquisition valuations.  The fact that the seller’s business has a collaborative culture and the buyer’s corporate culture is more autocratic became the most important variable.  The employee and customer retention and the projected growth and profitability of the combined entities could be higher IF the buyer is invested in learning how to be a more collaborative leader. They might have to leave the businesses completely separate (even when/if the ownership changes) if the buyer has no intention of changing. And if the collaborative leader (the seller) values keeping a team of people together, a sale may not be possible at any price.

It’s been our experience that the purchase price and long term ROI is adversely impacted when an autocratic buyer is involved. Would acquiring a collaborative business raise, lower or have no impact on the purchase price for you?  What could you do to be more collaborative and be more ready to acquire businesses at more affordable prices and increased ROI?

The Ripple Effect of High Profile Acquisitions

The Ripple Effect of High Profile Acquisitions

As an investor, perhaps you are a shareholder of APPLE stock. When you review news clips or IR reports, you might wonder what is behind the acquisition of the headphone company BEATS. You have invested in APPLE because they have been a major innovator and industry leader, so you wonder if this acquisition will add or detract from APPLE’s position as leading innovators.

As an APPLE customer, you wonder if your iPhone or iPad will now benefit from improved audio quality, or will you yet again be forced to buy a completely new product to get upgraded technology? You also can’t help but wonder why APPLE needed to do such an expensive acquisition to improve sound quality? Won’t this acquisition just raise the prices on APPLE purchases?

Perhaps you are a “techie” and get a kick out of analyzing product engineering. You quickly figured out that the BEATS technology isn’t all that special. You assume that APPLE has grown to prominence because its executives understand marketing. You wonder if the acquisition of celebrity-driven BEATS is more about marketing. If that is all the acquisition is about, wow…that is expensive marketing.

Maybe you oversee a sizable portfolio or are an asset manager within a wealth management firm. You saw how FACEBOOK recently made some acquisitions to slow competition, control emerging technology and buy time. Maybe that is what is going on at APPLE. After all, Steve Jobs is no longer at the helm. Is APPLE using its resources to buy time? Maybe APPLE’s strategic direction isn’t all that clear right now.

As a President of a midsized company, you watch the moves of major corporations like APPLE. You wonder if maybe APPLE’s research department has surfaced a trend that your company is too small to see. Perhaps there is a hot target market that APPLE can penetrate more aggressively. If your company’s products/services are tied to what APPLE does, will this be something important to explore or a distraction?

What do you hope that the directors on APPLE’s board are asking?

Directors of industry leading corporations have greater impact on all of our lives than most people realize.

The Exodus of a Division Head Can be Your Cue to Acquire

What prompts the head of a division to resign?

I am not talking about the person who has led a division for 30 years and retires. I mean resigns. Replacements happen through forced resignation (firing) when a division of a privately held midsized company hasn’t been hitting its numbers. However, unless a serious health issue is involved, resignation of a division head is rare…and is a warning.

Changing positions at that level is not done casually. Division heads often have an equity stake in the business, and their pensions and/or 401Ks can be adversely impacted if they resign. At that career level, few people resign before securing better positions elsewhere…which means that the growth and leadership decisions have been stagnating in the division for some time.

If the products/services of the division have solid growth potential, the resignation of the division head was probably prompted by a power struggle. Maybe the CEO wouldn’t delegate authority to the division head. Good people resign when they are held responsible for achieving results but are not acknowledged or compensated for doing it or when their budgets get raided to support other divisions that aren’t carrying their weight. Division heads expect to fully lead their divisions and not be micromanaged or second guessed.

When a division head resigns, it is not business as usual. Pause. Open up. Don’t make a hasty decision. Promoting a follower from within the division does not address what caused a competent division head to resign. Negotiating with entrepreneurial leader(s) of competing companies can be the wake-up call the CEO needs. When a business is acquired, the due diligence process invites everyone involved to take a fresh look at goals, strategic direction, the logic behind compensation and equity, budgets and delegation of authority.

As an Entrepreneur, Have You Lost Your Authentic Swing?

Businessman ThinkingI love the 2000 movie The Legend of Bagger Vance.

Remember it? Directed by Robert Redford, the movie was based on Steven Pressfield’s 1995 book with the same name. The actors include luminaries Jack Lemmon, Will Smith, Charlize Theron and Matt Damon. This was Lemmon’s final movie which makes it even more important to many people.

In 1931 (during the depths of the Great Depression), the City of Savannah, GA sponsors an exhibition golf tournament with great golfers Bobby Jones, Walter Hagan and the town’s golf prodigy and hero, Rannulph Junuh.

As he caddies, wise Bagger Vance (played by Will Smith) provides sage advice to help Junuh recapture his “authentic swing.” They talked very little about the fairway, sand traps or greens. They talked about post-traumatic stress, the meaning of life, guilt, regret, a broken heart, giving up, accepting responsibility and hiding. You know…light conversation (lol).

As many golfers of today can tell you, finding one’s authentic swing in golf is not just a matter of repetition. Golf is a mental game as much as it is a physical one. When a golfer’s muscles are tight from being angry at work, his/her slice or hook returns on the golf course. When a golfer’s optimism or confidence is compromised, the short game on the green becomes another nightmare. An executive’s capacity to make great strategic decisions is another version of one’s authentic swing.

Presidents of privately held mid-sized companies often don’t have time to play golf or have another similar outlet that offers feedback on whether the president is still centered. It is impossible to maintain your authentic swing when you aren’t centered. Often the all-important feedback comes in the form of poor business results. The president’s loss of his/her authentic swing is taken out on the business.

Sometimes executives just keep showing up when he/she knows he/she is “just not right with the world”. Continuing to show up is important, but just going through the motions can solidify bad decisions (a hook or a slice). Finding what keeps you centered is worth the effort. An executive coach could be your Bagger Vance.

Maybe No One Should Buy the Clippers from Sterling

SterlingWhat happens from here forward regarding Donald Sterling’s ownership of the Los Angeles Clippers has the potential to change the definition of business “ownership.” In my opinion (in addition to all of the lawyers), NBA Commissioner Adam Silver should consult with the National Association of Corporate Boards (NACD). I’ll bet they could provide insight and expanded options.

“The market” knows how to punish a disgraced business owner. Employees and customers who do not respect the owner(s) of an enterprise can hit owners where it hurts the most…their pocketbooks. Products can be boycotted. Lawsuits can be opened.

In this instance, millions of people hope Sterling feels pain swiftly. The sooner the better!

There are numerous examples in the world of professional services where a disgraced owner has lost everything when a new competing enterprise has been established, and the top talent from the previous team was “cherry picked.”

Can’t well connected people like Oprah Winfrey and Magic Johnson start a new team? I would buy some shares of a business owned by Winfrey and Johnson. Why pay Sterling a dime?! Could player contracts be broken? Could the NBA support the new entity?

If/when the NBA forces Sterling to sell his business, a statement of disgust will have been expressed by the employees, the fans and the NBA. But his racist beliefs will not have been changed. If the NBA can legally force Sterling to sell, he will end up with a multi-million dollar windfall (gain) and a precedent will be established that could have an adverse impact the rights of all business owners from here forward.

What constitutes business ownership?

More Evidence That EACH Board Seat MATTERS

Board Seats MatterWould you turn down an offer in excess of $19 Billion from Google CEO Larry Page to buy your startup business? According to the 02/21/14 article (Williams) in The Guardian, that’s exactly what WhatsApp, Inc. co-founders Brian Acton and Jan Koum did. Most people are guessing that Google wanted to keep WhatsApp away from Mark Zuckerberg and Facebook. So why did Acton and Koum turn down the larger offer? Koum wasn’t offered a seat on the Google Board. WhatsApp will now be added to Facebook’s portfolio and apparently Koum will serve on their Board.

You and I may not be co-founders of an innovative mobile messaging startup or CEOs of huge corporations, but we can learn from this transaction.

From the Viewpoint of the Buyer

  • Keeping a game changing technology out of the hands a primary competitor is worth a great deal of money, but compromising board effectiveness is a very high price to pay.
  • Just because a technology-focused person has developed one highly relevant product does not mean that he/she can ever repeat that accomplishment. Not every geek is a Thomas Edison, Albert Einstein, Benjamin Franklin or Leonardo da Vinci.
  • Just because a person can develop a product does not mean that he/she has the knowledge, analytical mind, experience, contacts and skills needed for successful board service.
  • The composition of a corporation’s board of directors involves an integrated process regarding strategic direction, recruitment of complementary skills, fiduciary responsibility, etc. An individual who assumes that he/she deserves to be a board member just because he/she developed one product is probably too self-serving to be an effective board member focused on building shareholder value.
  • The corporation may make decisions about the newly acquired product that the founder/previous owner might not like. The last thing the corporate CEO needs is an inappropriate, disruptive, divisive episode about a single product played out at the board level.

From the Viewpoint of the Seller

  • Above a certain amount of money (which differs from person to person) other factors are more important than more money.
  • Creative people believe that they have more than one innovation in them. They seek situations that encourage continued creativity and influence.
  • Access to the information shared within a powerful corporate board keeps a creative person relevant, excited and involved. That’s priceless.
  • So many corporations are dominated by their Chairman/CEO. Another board member wouldn’t represent any threat to the status quo.

My guess is that Jan Koum is bright and creative, but he lacks training and experience about the responsibilities of corporate board members. Perhaps he has served on the board of a small privately held company where board members were essentially viewed as advisors.

Alternate Between Divergent and Convergent Thinking When Negotiating Deals

Divergent ThinkingYou have been considering your options, running scenarios, and have come up with what you think is a great idea. But your idea can’t possibly be in another person’s budget or plan. You just came up with it. Both parties usually don’t think of a possible deal or new working relationship at the same time. It’s human nature (and more so these days) for a person to be inclined to say “no” if a deal wasn’t his/her idea. So, the first step in deal negotiation is to help other people open up, get caught up, and not feel rushed. If you push to sell your conclusion, you are very likely to prompt a negative response.

It can help to alternate between divergent and convergent thinking when discussing new working relationships or deals. Once you think you have discovered a good option take a step back and start your discussion with the other party with the premise that there could well be ways that the two of you could work together that would be mutually beneficial. That way, the first discussion is exploratory and expansive (divergent). Together, you generate multiple ideas and approaches.

The operative word here is “together.”

The second time you meet, you can shrink the options down to 3-4 that have merit, which is convergent thinking. Together, you can divide up the “homework” to be done. One of you may research the joint venture option. The other may spell out how money would flow if it should be a strategic alliance instead. Or, one of you might clarify how a partnership might work while the other thinks through how a loan could be executed without a partnership involved.

The operative word here again is “together.”

Deals often fall apart in the early stages because one person was too focused on a single conclusion or only one side is doing due diligence. Deals also fall apart when one participant reveals worries or focuses on possible problems way too early in the process.

If there is consensus on a possible mutually beneficial approach, the third meeting can be dedicated to how to prevent problems, minimize barriers to success, address worries, etc. Aired before concept consensus, those concerns just sound like fretting. Divergent thinking is involved when listing what could go wrong and what might be needed to address issues.

The fourth meeting is the most important in most deals. What will each entity actually commit to doing? Who else will be needed in order for the concept to pay off? What is the best timeframe? What ROI is reasonable for both? Is there a fallback or contingency plan?

In my opinion, lawyers should not be involved in deal discussions until the fifth meeting. Their role is adversarial by definition and certainly feels divergent. Business leaders need to know what they want and be centered, so they can provide clear directions to the attorneys. Life is good when attorneys are asked to explore a concept’s viability versus identifying all the ways it may not work.

The sixth meeting is sometimes referred to as the “champagne meeting”. Together, agreements are signed. The launch is rehearsed. Key people who will make the concept pay off are present.

Again, the operative word is “together.”

When a PRIME Expresses Interest in Acquiring a Subcontractor

Joint VenturesLMN, Inc. has grown over the past few years primarily as a subcontractor to much larger (PRIME) corporations. LMN utilizes a mix of domestic and off shore employees to maintain quality and minimize costs. Recently, large clients have been approaching LMN directly. LMN’s certifications as a small, minority owned-, and woman owned- business may have opened some doors, but it’s clearly their capacity to execute well that is attracting large projects.

Recently, one of the large corporations (PRIME) that has been consistently sending business LMN’s way has expressed an interest in acquiring LMN. The large corporation is particularly interested in how LMN’s offshore staffing is handled.
The Owner/President of LMN was inclined to answer the prime corporation’s questions openly and completely. She wanted to demonstrate appreciation for all of the projects that have been subcontracted to LMN. And she was concerned that if she isn’t forthcoming, the pipeline of projects from that major corporation will stop.

What would you do if you were the Owner/President of LMN?
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The answer flows from where the Owner/President of LMN was/is headed before the possibility of being acquired came up.

If the Owner/President is tired, bored, or ready for a new challenge, she might view acquisition as a welcome exit strategy. However, if she has waited too long and is really tired, she may be way too inclined to reveal trade secrets. I know of situations like that where the owner of the subcontracted company said so much that the larger corporation didn’t need to acquire her company. They simply took the information, used it to make improvements to their approach, and left the former subcontractor “hanging in the breeze.”

If you would be inclined to sell in this situation, it pays to utilize advisors so you don’t share too much and inadvertently lower the perceived value of your business.

We helped one of our clients in that circumstance sell her shares to a few company executive(s) so she could get the money she wanted and the executives (new owners) would then negotiate with the larger corporation about possible acquisition (or not).

If LMN’s Owner/President has taken a longer term view, she may be excited about the fact that large accounts are now coming directly to LMN and be glad that LMN is less dependent on any one (or a few) PRIME corporation(s). If so, she would see that just because the larger corporation has expressed an interest in acquiring her company, she should still protect its trade secrets.

(Note: In some ways, having a high percentage of your business coming from one major corporation feels like a bad acquisition has already happened. The large corporation may not have paid you, but they do essentially own you.)

This is a peer-to-peer situation that calls for equal levels of disclosure, due diligence, and exploration of the pros/cons to closer affiliation. It is not the time to think of terms of “courting the major corporation.” The large corporation should be courting LMN. What is the benefit of affiliating? What is so wonderful about becoming part of the major corporation that beats owning your own business?

Why is the larger corporation interested in acquiring LMN? Or are they really interested in eliminating competition (since large clients are now going directly to LMN)?

We advised LMN’s Owner/President to explore the possibility of a joint venture and table the acquisition discussion for now. Joint ventures involve clear commitments, declared time frames, shared responsibility, etc. If the two entities can find a fair approach to work closely together to both benefit…why would an acquisition be necessary?

 
 
 
 
 
 
 
 

Is Your Corporate Culture Fueling or Sabotaging Growth?

A few of our clients have had DRAMA as part of their corporate cultures. You know the type. When a team member Corporate Culturemakes a suggestion, it is immediately perceived as an attack on someone else. When employees come into the office in the morning, they immediately tell one another stories about what went wrong on the home front. When a customer complains, the blame game starts plus the problem is blown way out of proportion. And no…they are not both family owned/operated businesses.

The leaders came to us as growth strategists to identify opportunities to speed up their growth. The opportunities were fairly easy to identify from the market (external) perspective. Competitors in both instances were leaving “money on the table” so there is “low hanging fruit” to be claimed. Large corporations have been taking their customer bases for granted, so there is tremendous opportunity for a customer-centric, quality-oriented competitor.

You guessed it, we are focusing on changing their corporate cultures.

IF the leadership teams each truly want their enterprises to accelerate growth, they both must address internal behaviors that interfere with innovation (instead of suggestions being stifled), quick response (instead of losing time to blaming one another), reassurance and trust (instead of exaggeration and a focus on the negative), welcoming optimism (rather than complaints and negativity).

Often corporate culture can be utilized as a leverage point for growth. When a company wins “BEST PLACES TO WORK” awards and has a reputation for investing in its employees, organic growth usually results.

A corporate culture of innovation or excellence can guide mergers and acquisitions. No matter what technology, production capacity or distribution channel drove the companies to combine, alignment of corporate cultures is needed to optimize the return on investment with mergers and acquisitions.

At IMC’s annual GROW! Conference in Las Vegas earlier this week, Dr. Charlotte Roberts provided an excellent presentation about MENTAL MODELS. (Roberts coauthored THE DANCE OF CHANGE and THE FIFTH DISCIPLINE FIELDBOOK.) One of her reminders was that corporate culture is the combination of the prominent mental models. Beliefs and premises are at the heart of mental models and corporate culture.

The lingering post-recession uncertainty, frustrations with Government, global terrorism, etc. have eroded the optimism of so many people in this world. It may be time for you to audit the beliefs, premises, mental models within your organization. When people are jumpy, convinced they might get fired, or waiting for the executives to make decisions, accelerated growth can’t be the first thing you tackle.

Before Entering Into An Acquisition: Consider This

The uncertain economy explains some of the decline in corporate M&A activity over the past few years.  Major corporations are still hoarding cash. Large acquisitions now seem (appropriately) less focused on geographic expansion and more focused on increasing capabilities to improve the profitability of core products and services.

But I am have noticed increased interest in acquisitions in the mid-cap arena. When you drill down deeper, you sometimes discover that a President of a privately held midsized companies views “having at least one successful acquisition under his belt as an important credential.”  In the President’s mind he has proven that he understands how money works, can win a potentially complex negotiation, can eliminate a competitor, and is a serious contender ready for bigger and better things. Can you see the element of ego involved with the view of first acquisitions?

So when an opportunity surfaces, that President tends to jump at the chance and dives right into projecting how much money they will make when the acquisition works.

It has been my observation of the behavior of Presidents of many companies end up doing any of the following unproductive things:

  • become so distracted by acquisition negotiations that they drop the ball on major proposals.
  • suddenly pull back and not involve their Controller or CFO in analyzing the potential cost of acquiring a business.
  • “go dark” and become very private and not communicate what they are doing to their COOs, VP Sales, or other members of their executive team.

Think about the damage and loss of trust when that happens!

A President can become so determined to make his first acquisition work that he skips important due diligence steps.  This is often referred to as “falling in love with the deal.” I laughed when I heard that phrase used about CEOs of larger companies during a recent webinar, M&As VIEWED FROM THE BOARD AUDIT COMMITTEE PERSPECTIVE sponsored by the NACD and KPMG.

“Falling in love with the deal”

This is so true and is worth repeating, because it is exactly what happens.  But, if you are the President of a privately held midsized company, you can’t afford this mentality.  Consider the following to protect your interests:

  • taking a seminar or two about what’s involved with due diligence
  • involving your executive team in the discussion, since you will need assistance to succeed
  • establishing at least an advisory board with experience in things like acquisitions, so someone asks you objective relevant questions
  • the cost of distraction, lost trust, missed opportunity, etc. if you let yourself get all wound up in trying to prove you can negotiate an acquisition on your own
  • And also ask yourself why you feel the need to prove yourself or why you are looking for greater challenge…more action.

Changes in what you are doing on a day to day basis could free you up to take on new exciting challenges (including acquisitions) in a more appropriate and cooperative manner.

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